Mervyn King yesterday laid the blame for the credit crunch squarely at the door of commercial banks, criticising their excessive pay packages and risky lending.

The Bank of England governor also told the Treasury select committee he was unhappy that excessive pay in the City attracted too many young people away from careers elsewhere.

Speaking as data emerged showing that the credit crunch had hit retail sales, consumer confidence and mortgage lending hard, King said he hoped the banks would learn the lessons from the crisis and rein in their pay structures and be more responsible in their lending.

"Banks have come to realise in the recent crisis that they are paying the price for having designed compensation packages which provide incentives that are not, in the long run, in the interests of the banks themselves, and I would like to think that would change," King said.

Last week the director-general of the CBI, Richard Lambert, said the bonus culture in the City and Wall Street had been responsible for much of the excessive risk-taking that led to the collapse of the US mortgage and housing markets.

King said yesterday, however, that the hubris of which the City had been guilty had now disappeared, as banks were having to raise capital from their shareholders and cut jobs to repair their balance sheets. "I don't think there is much hubris around today. I hope we do not return to this hubris ... it is important that people learn the lessons from this crisis."

He criticised banks' excessive risk-taking in the past few years and was unhappy that banks that had not parcelled up and sold on risky US mortgage products had been "pilloried" by their peers.

He complained that high pay in the City was a lure to too many. "I do think it is rather unattractive that so many young people, when contemplating careers, look at the compensation packages available in the City and think that these dominate almost any other type of career.

"It's not a very attractive situation that such a high proportion of our talented young people naturally look at the City and think it is the only place to work in. It shouldn't be. It should be one of the places, but not the only one," he said.

King added that his plan, announced last week, to provide extra funds to banks to lubricate the seized up banking system was designed to get the banking system moving again, not to "kick-start" the mortgage market, despite claims by the chancellor, Alistair Darling, that it was.

"It would be a serious mistake to go back to where the mortgage market was a year ago," said King, who has said the housing market is going through a "necessary adjustment".

The scheme, which involves swapping mortgages for government bonds, was designed to ensure all the risks would remain with the banks, he repeated. If house prices fell significantly, undermining the value of mortgages, Threadneedle Street would ask banks to deposit more mortgages so that the Bank of England would not be taking on any more risk.

He reiterated his concern that rising food and energy prices could push consumer price inflation above 3% this year, more than a percentage point above its government-set target of 2%. But he said inflation should fall back after that, as long as food and oil prices did not continue to rise as steeply as they have been.

He was encouraged that, so far at least, higher inflation - currently at 2.5% - had had little impact on wage deals. It was quite likely the economy would grow more slowly in the next year or two, but that was no bad thing. "We need to see a rebalancing," he said.